GRPN Groupon: Fascinating company but fabulously overvalued

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	Josh Warner-Burke
	Baltimore User since Nov 2007	56
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Fascinating company but fabulously overvalued

It's been a long time since an IPO generated as much buzz - both positive and negative - as Groupon has done with its $12B IPO today. With the price now around $30 that is a valuation of around $20B. Bigger than Chipotle, Sirius XM, Ralph Lauren, Netflix, and Research in Motion, investors are showing a huge appetite for the daily deals company that didn't exist three years ago.

I've read a good bit about the history of the company and what makes it unique, their business strategy, notably from this very thorough profile:

http://www.businessinsider.com/inside-groupon-the-truth-about-the-worlds-mo...

The biggest and most prescient criticism of the business model is that it is easy to copy. This article addresses their handling of this early on:

"We realized the main barrier to entry is going to be scale. So we wanted to get to as many cities as we can because we saw direct, outright, verbatim copies of what we were doing, popping up all over the place pretty quickly. We said we can either go chase them and beat them back and fight them legally, or race ahead and do what we do, as best we can. So the choice was to not look back, and try to be better and bigger."

So they have an installed base around 140 million users. It is not going to be easy to be Groupon overnight. But they just don't have anything particularly unique. I think they're very savvy and it will take time but eventually it will lose its lustre as the market gets very crowded.

There are some well thought-out rebuttals to the criticism of Groupon here:

http://www.marketwatch.com/story/moatless-rudderless-groupon-now-worth-126-...

Mainly I am bullish on the company's prospects but I feel that it's been caught up in an IPO fever that significantly overvalues the company. Perhaps some day a valuation of $20B will not be absurd, but today, it is. It also seems to be notoriously dangerous lately to buy in on IPO day.

This is an interesting rebuttal of the idea that anyone can start a Groupon - which is not my position at all, I am suggesting a Google or Facebook has a better chance of successfully competing with them (though after this IPO, Groupon is pretty deep-pocketed):

http://andrewchenblog.com/2011/06/03/anyone-can-start-a-groupon-and-other-s...

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What People Are Saying...

Mike Barkett said at 11/4/11 11:57 AM and replied Price action was $27.92 7.92 (+39.6%)

Re: Fascinating company but fabulously overvalued
$16.00 (-44.5%) by 11/4/12
In the articles you linked, a couple of things jump out at me. First, the mastermind who grew them so fast is no longer even involved in daily operations. Secondly, with this IPO they are raising enough money to advertise for about 3 quarters at their previous rate, losing $170M/quarter. It's nice that they can turn the marketing on or off at a whim, but should be disconcerting that it does not appear to necessarily produce an immediate return in either new subscribers or profitable voucher purchases. I have to say, my gut feeling on this is that the business model is fundamentally flawed, and as your bearish article states, there is no moat around it. Imagine for example if AMZN instituted "buying groups" or whatever, where you got big discounts as long as you bought 10 or 15 "product of the day" products per year. It wouldn't kill GRPN, because GRPN has so much local service business, but the concept could be applied locally. They are a middle-man for advertising local services. The Pennysaver of the web. But we already have Facebook and Google and Foursquare, etc. where businesses can point and click to directly advertise to specific demographics, so I don't see the point.

I am willing to be dead wrong on this, and it seems like the market rewards the zaniest business models. But if GOOG, who has purchased a public company recently at a premium, thought they were worth $6B, then that's probably a fair price. I doubt they are worth much more than that.

Josh Warner-Burke said at 11/8/11 9:37 PM Price action was $24.90 -1.07 (-4.1%)

For Groupon, the really hard work starts now http://www.forbes.com/sites/forrester/2011/11/08/for-groupon-the-really-har...

including: "Expect to see more full-price selling" and "Enable merchants and brands to 'cherry pick' which shoppers/consumers get their offers"

Josh Warner-Burke said at 11/16/11 4:49 PM Price action was $24.03 -0.04 (-0.2%)

LivingSocial adding its own high-end spin to local deals with restaurant delivery and room service http://www.digitaltrends.com/social-media/livingsocial-pairs-real-time-disc...

Josh Warner-Burke said at 11/22/11 3:00 PM Price action was $21.01 -2.57 (-10.9%)

I'll take the win here.

Josh Warner-Burke said at 11/23/11 10:51 AM Price action was $17.15 -2.92 (-14.5%)

Classic botched early close.

Mike Barkett said at 11/23/11 11:12 AM Price action was $17.40 -2.67 (-13.3%)

Not really botched because you hit your target, but yeah you coulda made more. I figured if people are spooked about holding crap over regular weekends, then a 4-day weekend after stupor committee failure is even worse. However, I agree with Alex that there will be a buy point for GRPN at some point.